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California Casinos Seek More Slots

7 March 2003

by Liz Benston

LAS VEGAS -- Two tribal casinos in California managed by Las Vegas companies may seek an increase in the number of slot machines they are allowed under existing state compacts, representatives say.

Harrah's Entertainment Inc. manages the Harrah's Rincon Casino and Resort near San Diego for the Rincon San Luiseno Band of Mission Indians. Station Casinos Inc. will manage and is developing the upcoming Thunder Valley Casino near Sacramento for the United Auburn Indian Community.

Both tribes have recently joined a coalition of 21 California tribes that became the first in the state to formally announce their desire to discuss sharing casino revenue with the state in exchange for expanding the number of slot machines at their casinos, among other issues.

California tribes now may offer up to 2,000 devices each.

In a letter to California Gov. Gray Davis last month, the coalition said it recognizes that "the exercise of rights triggers responsibilities, including the obligation to fairly mitigate off-reservation impacts of future development."

The coalition -- representing a cross-section of tribes with both large and small casinos as well as tribes without casinos -- expects to negotiate a variety of issues with the governor beginning this month. It also aims to distance itself from other tribes that have been critical of the governor's plan to extract $1.5 billion in revenue from the state's tribal casinos.

The Auburn tribe may ask for more slot machines because it is closer to urban areas that can support greater demand, said Howard Dickstein, a Sacramento attorney representing Auburn and other coalition tribes.

John Currier, chairman of the Rincon tribe, said it expects to negotiate the ability to add more slots at some point in the future when the property has matured.

Fees for new slots must be reasonable, however, Currier said.

"If another (tribal casino) open for 10 years is willing to pay more, we wouldn't be able to afford it at this time."

Slots have start-up costs and may only be profitable during peak weekend periods, he said. And competition has intensified.

The Rincon casino is within a 20 mile radius of five tribal casinos -- the most dense casino market in California.

"It used to be, 'Build it and they will come,' " Currier said. "Conditions have changed. You really have to go out and find new customers. It's very difficult to get existing casino customers to go to your casino."

The fact that three California tribes with significant Las Vegas connections have joined the coalition isn't a coincidence, he added.

"The tribes in this coalition are business-minded tribes," he said. "They didn't enter into agreements with expert licensed operators coincidentally."

On the other hand, many other tribes -- whether they belong to the coalition or not -- can't support additional slots because they lack the demand, Dickstein said.

Only about a dozen gaming tribes will likely ask for slot increases to accommodate gamblers, he said.

That means Gov. Davis is unlikely to raise the kind of revenue he wants to help plug the state's budget deficit -- unless he allows tribes to build future casinos away from rural, tribal land and in urban areas that can attract more customers, he said.

Gov. Davis remains opposed to urban casinos. But that may change, Dickstein said.

"I think closing the budget deficit may be a higher priority now than discouraging urban casinos," he said. "It's casinos near urban areas that can use profitably more than 2,000 machines and can afford any significant revenue-share on those machines."

If tribes were to share 25 percent of their casino revenue -- similar to a plan underway in New York -- California would need to at least double the number of slot machines, he said.

Though doubling machines is unlikely, tribes of all sizes and affiliations appear interested in removing the state cap on slot machines to allow market forces to dictate how many machines their casinos can have, Dickstein said.

Major Las Vegas companies -- after fighting an initial effort to legalize tribal casinos in California -- have more recently expressed interest in striking management contracts with tribes.

Still, the investment prospects for local companies have diminished as tribes ink deals with management entrepreneurs based outside Nevada, experts say.

Many of California's gaming tribes already have established relationships with investors and are inundated with offers from others, said Jerry Turk, owner of the management company for the tribal Pala Casino near San Diego.

Linda Roe, vice president of business development for Las Vegas casino developer Marnell Corrao Associates and a tribal gaming expert, says opportunities still exist for management companies that are willing to try harder to form lasting relationships and make a long-term commitment to the well-being of the tribe.

"They're being careful," Roe said of the tribes. Some savvy tribes don't need help. But the ones that do are looking for companies they can develop long-term partnerships with rather than for firms looking to turn a quick buck.

Harrah's Rincon Casino -- which opened last August with 1,500 slots, 200 hotel rooms and six restaurants -- is perhaps the most well-known example of a Las Vegas company partnering with an Indian tribe.

Harrah's hasn't said whether it expects to expand the resort, deferring instead to tribal leaders. But company spokesman Gary Thompson said it's possible given the property's better-than-expected casino performance and hotel occupancy rates in the mid to high 90s.

Station Casinos expects to earn more than $25 million a year for managing the Thunder Valley Casino for the Auburn tribe. Thunder Valley -- expected to open in June with up to 1,900 slots, 100 table games, a bingo room and a VIP gambling area -- is able to accommodate up to 3,000 slots, Station Casinos executives say.

The neighborhood casino operator bought another 100 acres across from Thunder Valley and has an option to buy another 150 acres nearby. The company has declined to reveal plans for either site, such as whether it would build a hotel for gamblers.

Historically, the company has master-planned its locals' casinos by buying up a significant amount of surrounding land that has since been developed into retail stores, theaters or hotel rooms.

Major Las Vegas operators including MGM MIRAGE, Park Place Entertainment Corp. and Boyd Gaming Corp. have expressed interest in pursing management contracts with Indian casinos.

MGM MIRAGE has been especially vocal about pursuing tribal relationships. The company last year hired a development chief with a pre-existing relationship with the Agua Caliente Band of Cahuilla Indians who serves as a design consultant for a new casino in downtown Palm Springs. It's a limited and less-lucrative arrangement that doesn't involve managing the casino and therefore doesn't require federal approval.

Besides Harrah's Rincon and Thunder Valley, two other California casinos have significant Las Vegas connections.

The Pala Casino made headlines when it became the first new permanent casino to open after the passage of a voter initiative in 2000 that allowed Las Vegas-style casinos in California. It also marked the first time a Nevada gaming company was brought in to invest in a tribal casino.

Turk, a former co-owner of Fitzgerald's casino in downtown Las Vegas, brought in partner Anchor Gaming of Las Vegas to manage the casino. Before consummating its $1.4 billion merger with slot giant International Game Technology last year, Anchor announced it would sell its majority stake in Pala's management company to Turk.

The Pala tribe -- a member of the 21-tribe coalition -- will also likely expand its 2,000-slot maximum if Gov. Davis' revenue-sharing proposal makes economic sense, Turk said.

Adding slots ultimately dilutes the profits produced by existing machines, he said.

And because machines are replaced so often, it's also difficult to identify which are new machines and therefore subject to the state's potential revenue-sharing plan, he said.

In the meantime, the casino is anticipating a summer opening for a 507-room hotel, 30,000 square feet of meeting space and a spa.

"The whole objective is to create more of a destination (resort)," Turk said. "When we're done we'll have a property that's equal in quality to anything in Las Vegas."

Siren Gaming, a business unit of Marnell Corrao Associates pursuing Indian casino management deals, is running the Valley View Casino near San Diego for the San Pasqual Band of Mission Indians. Siren's team includes former executives of the Rio in Las Vegas. Its president, John Lipkowitz, was the general manager of the Rio when it was owned by design magnate Anthony Marnell.

Still, major Las Vegas companies -- wary of the growth of Indian gaming in their largest drive-in market -- have been slower to join the competition.

In most cases, business pitches to tribes aren't coming from the nation's gaming capital but from entrepreneurs across the nation who are trying to cash in on a windfall of gaming expansion, tribes say.

Coalition member Nicholas Fonseca, tribal chairman of the Shingle Springs Band of Miwok Indians in Northern California, has been inundated with calls and mailers from investors nationwide seeking a deal to manage, finance or otherwise help the tribe develop its upcoming casino.

"There are people trying to break into the industry," Fonseca. Many are uneducated about Indian gaming law and believe that tribes can simply build casinos on non-tribal land without argument, he said.

The tribe already has inked a deal with Lakes Gaming, a Minnesota company controlled by Lyle Berman, the former president and chairman of the Stratosphere in Las Vegas.

The Mechoopda Indian Tribe of Chico Rancheria Indians doesn't even have a gaming compact with the state, much less a casino. But the tribe has a business deal with First Nation Gaming, a management company owned by the Tunica-Biloxi Indian tribe in Louisiana, that aims to help the tribe obtain land for a casino.

The tribe joined the coalition to "protect the interests of non-gaming tribes like ourselves and remove some of the market barriers" to casino development, tribal chairman Steve Santos said. The statewide cap on slot machines "prevents even small tribes like ourselves from entering gaming," he said.

The Alturas Rancheria, which operates a small, 80-slot locals' casino in the rural, northeast corner of California, says it isn't looking to expand its machines to a number that would attract interest from Las Vegas investors.

The tribe likely won't offer more than 350 slots, which could trigger a requirement that the tribe share its slot revenue with non-gaming tribes, tribal administrator Susie Hegsted said.

"We don't have the market for that," she said. "I think what the smaller tribes are looking for in these compact negotiations is to continue what the Governor wants, that (larger) tribes share the wealth with the smaller tribes" that can't build casinos in more-lucrative areas, she said.

The small tribe still is receiving an increasing amount of mailers from investment groups and other companies nationwide seeking casino deals, she said.

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